Separating an embedded derivative

Learning objectives

• Assess the three conditions for separating a derivative embedded in a non-financial host (risks not closely related, definition of a derivative, hybrid contract not measured at fair value through profit or loss).L3, L4
• Record the journal entries for separating embedded derivatives from other hosts and measure their effect on the financial position, profit or loss and other comprehensive income.L3, L4

Normative references

• IFRS 9 §4.3.3When the host is not a financial asset within the scope of the Standard, the embedded derivative is separated and accounted for as a derivative only if three conditions are met: its economic characteristics and risks are not closely related to those of the host; a separate instrument with the same terms would meet the definition of a derivative; the hybrid contract is not measured at FVTPL.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• A hybrid contract has as its host a contract that is not a financial asset within the scope of IFRS 9. Which conditions must be met for the embedded derivative to be separated and accounted for as a derivative? More than one answer is possible.L3
• Iota SA issues a hybrid instrument whose host is a financial liability. It includes an embedded derivative whose economic characteristics and risks are not closely related to those of the host, and a separate instrument with the same terms would meet the definition of a derivative. Iota measures the whole hybrid contract at fair value through profit or loss. Is the embedded derivative separated from the host?L4